CREDIT TRANSACTIONS Q and A

I. Distinguish:
A. Mutuum and commodatum

Uribe Audio:

As to cause, Commodatum is essentially gratuitous. Mutuum, on the other hand,

may or may not be gratuitous. It can be onerous if there is an express stipulation of
payment of interest.

As to transfer of ownership, there is no transfer of ownership in Commodatum. In

Mutuum, there is transfer of ownership but there is an obligation to replace the thing of
the same kind and quality.

As to subject matter, Commodatum can involve movable or immovable

property. Mutuum only involves movable property.

As to Object, Commodatum involves non-fungible things because the bailee has

to return the thing. Mutuum, on the other hand, involves fungible things because it can
be replaced by same kind and quality)

UP LAW:

In MUTUUM, the object borrowed must be a consumable thing the ownership of

which is transferred to the borrower who incurs the obligation to return the same
consumable to the lender in an equal amount, and of the same kind and quality.

In COMMODATUM, the object borrowed is usually a non-consumable thing the

ownership of which is not transferred to the borrower who incurs the obligation to return
the very thing to the lender.

B. Usufruct from commodatum and state whether these may be constituted

over consumable goods. (2%)

Uribe Audio:

Consumable goods can be object of Commodatum as long as object is not for

consumption.

UP LAW:

USUFRUCT is a right given to a person (usufructuary) to enjoy the property of

another with the obligation of preserving its form and substance. (Art. 562. Civil Code)
On the other hand, COMMODATUM is a contract by which one of the parties (bailor)
delivers to another (bailee) something not consumable so that the latter may use it for
a certain time and return it. In usufruct the usufructuary gets the right to the use and to
the fruits of the same, while in commodatum, the bailee only acquires the use of the
thing loaned but not its fruits. Usufruct may be constituted on the whole or a part of the
fruits of the thing. (Art. 564. Civil Code). It may even be constituted over consumables
like money (Alunan v. Veloso, 52 Phil. 545). On the other hand, in commodatum,
consumable goods may be subject thereof only when the purpose of the contract is
not the consumption of the object, as when it is merely for exhibition. (Art. 1936, Civil
Code)

C. Distinguish consensual from real contracts and name at least four (4) kinds of
real contracts under the present law. (3%)

Uribe Audio and UP LAW:

CONSENSUAL CONTRACTS are those which are perfected by mere consent (Art.
1315 Civil Code). REAL CONTRACTS are those which are perfected by the delivery of
the object of the obligation. (Art. 1316, Civil Code) Examples of real contracts are
deposit, pledge, commodatum and simple loan (mutuum).

D. The parties to a bailment are the:

a) bailor;

b) bailee;

c) comodatario;

d) all of the above;

e) letters a and b (Uribe Audio)

II. CONTRACT OF LOAN: INTEREST

A. The parties in a contract of loan of money agreed that the yearly interest rate is 12%
and it can be increased if there is a law that would authorize the increase of interest
rates. Suppose OB, the lender, would increase by 5% the rate of interest to be paid by
TY, the borrower, without a law authorizing such increase, would OBs action be just and
valid? Why? Has TY a remedy against the imposition of the rate increase? Explain.

UP LAW:

OB's action is not just and valid. The debtor cannot be required to pay the
increase in interest there being no law authorizing it, as stipulated in the contract.
Increasing the rate in the absence of such law violates the principle of mutuality of
contracts.
ALTERNATIVE ANSWER:

Even if there was a law authorizing the increase in interest rate, the stipulation is
still void because there is no corresponding stipulation to decrease the interest due
when the law reduces the rate of interest.

B. Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum
interest. However, the promissory note contained a proviso that the bank reserves the
right to increase interest within the limits allowed by law. By virtue of such proviso, over
the objections of Samuel, the bank increased the interest rate periodically until it
reached 48% per annum. Finally, Samuel filed an action questioning the right of the
bank to increase the interest rate up to 48%. The bank raised the defense that the
Central Bank of the Philippines had already suspended the Usury Law. Will the action
prosper or not? Why? (5%)

UP LAW:

The action will prosper. While it is true that the interest ceilings set by the Usury
Law are no longer in force, it has been held that PD No. 1684 and CB Circular No. 905
merely allow contracting parties to stipulate freely on any adjustment in the interest rate
on a loan or forbearance of money but do not authorize a unilateral increase of the
interest rate by one party without the other's consent (PNB v. CA, 238 SCRA 2O [1994]]).
To say otherwise will violate the principle of mutuality of contracts under Article 1308 of
the Civil Code. To be valid, therefore, any change of interest must be mutually agreed
upon by the parties (Dizon v, Magsaysay, 57 SCRA 25O [1974]). In the present problem,
the debtor not having given his consent to the increase in interest, the increase is void.

Arlene:

The action will prosper. While it is true that the Usury Law is suspended, the
Supreme Court declared that a stipulation of 3% per month is void. (Macalino v.
BPI, 2009) The rate of 3% per month and higher are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. Since the stipulation on the interest rate is void, it is
as if there was no express contract thereon. Hence, courts may reduce the
interest rate as reason and equity demand.

III. RIGHTS AND OBLIGATIONS OF BAILOR AND BAILEE

Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with Tito,
with the understanding that the latter could use it for one year for his personal or family
use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van were
faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount of
P15,0000.00. After using the vehicle for two weeks, Tito discovered that it consumed too
much fuel. To make up for the expenses, he leased it to Annabelle. Two months later,
Pedro returned to the Philippines and asked Tito to return the van. Unfortunately, while
being driven by Tito, the van was accidentally damaged by a cargo truck without his
fault.

a. Who shall bear the P15,000.00 spent for the repair of the van? Explain. (2%)

Uribe Audio:

Pedro should bear the P15, 000.00 spent for the repair of the van. Tito is entitled to
reimbursement because it is necessary for the use and preservation of the van.

UP LAW:

ALTERNATIVE ANSWER: Tito must bear the P15,000.00 expenses for the van. Generally,
extraordinary expenses for the preservation of the thing loaned are paid by the bailor,
he being the owner of the thing loaned. In this case however, Tito should bear the
expenses because he incurred the expenses without first informing Pedro about it.
Neither was the repair shown to be urgent. Under Article 1949 of the Civil Code, bailor
generally bears the extraordinary expenses for the preservation of the thing and should
refund the said expenses if made by the bailee; Provided, The bailee brings the same to
the attention of the bailor before incurring them, except only if the repair is urgent that
reply cannot be awaited.

ALTERNATIVE ANSWER: The P15,000.00 spent for the repair of the van should be borne by
Pedro. Where the bailor delivers to the bailee a non-consummable thing so that the
latter may use it for a certain time and return the identical thing, the contract
perfected is a Contract of Commodatum. (Art. 1933, Civil Code) The bailor shall refund
the extraordinary expenses during the contract for the preservation of the thing loaned
provided the bailee brings the same to the knowledge of the bailor before incurring the
same, except when they are so urgent that the reply to the notification cannot be
awaited without danger. (Art. 1949 of the Civil Code) In the given problem, Pedro left
his Adventure van with Tito so that the latter could use it for one year while he was in
Riyadh. There was no mention of a consideration. Thus, the contract perfected was
commodatum. The amount of P15,000.00 was spent by Tito to tune up the van and to
repair its brakes. Such expenses are extra-ordinary expenses because they are
necessary for the preservation of the van Thus, the same should be borne by the bailor,
Pedro.

b. Who shall bear the costs for the vans fuel, oil and other materials while it was
with Tito? Explain. (2%)

Uribe Audio:
 Tito must pay for the ordinary expenses. This is not subject to reimbursement
because it is necessary for ORDINARY USE only, not EXTRAORDINARY USE. This is
essentially commodatum, ergo, gratuitous. As such, Pedro does not have the
obligation to pay for the ordinary expenses in the ordinary course of things.

UP LAW:

Tito must also pay for the ordinary expenses for the use and preservation of the thing
loaned. He must pay for the gasoline, oil, greasing and spraying. He cannot ask for
reimbursement because he has the obligation to return the identical thing to the bailor.
Under Article 1941 of the Civil Code, the bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.

c. Does Pedro have the right to retrieve the van even before the lapse of one
year? Explain. (2%)

UP LAW:

ALTERNATIVE ANSWER: No, Pedro does not have the right to retrieve the van before the
lapse of one year. The parties are mutually bound by the terms of the contract. Under
the Civil Code, there are only 3 instances when the bailor could validly ask for the return
of the thing loaned even before the expiration of the period. These are when: (1) a
precarium contract was entered (Article 1947); (2) if the bailor urgently needs the thing
(Article 1946); and (3) if the bailee commits acts of ingratitude (Article 1948). Not one of
the situations is present in this case. The fact that Tito had leased the thing loaned to
Annabelle would not justify the demand for the return of the thing loaned before
expiration of the period. Under Article 1942 of the Civil Code, leasing of the thing
loaned to a third person not member of the household of the bailee, will only entitle
bailor to hold bailee liable for the loss of the thing loaned.

ALTERNATIVE ANSWER: As a rule, Pedro does not have the right to retrieve the van
before the lapse of one year. Article 1946 of the Code provides that "the bailor cannot
demand the return of the thing loaned till after the expiration of the period stipulated,
or after the accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent need of the thing, he
may demand its return or temporary use." In the given problem, Pedro allowed Tito to
use the van for one year. Thus, he should be bound by the said agreement and he
cannot ask for the return of the car before the expiration of the one year period.
However, if Pedro has urgent need of the van, he may demand for its return or
temporary use.

d. Who shall bear the expenses for the accidental damage caused by the
cargo truck, granting the truck driver and truck owner are insolvent? Explain.
(2%)
Uribe Audio:

Pedro should bear the loss if it is caused by a fortuitous event. If damage is

caused while being used: reimbursement is 50%. If damage is caused without the
vehicle being used: reimbursement is 100%. In the given case, because the accident
happened while the vehicle is being used, there should be reimbursement of 50%.

UP LAW:

SUGGESTED ANSWER: Generally, extraordinary expenses arising on the occasion of the

actual use of the thing loaned by the bailee, even if incurred without fault of the bailee,
shall be shouldered equally by the bailor and the bailee. (Art. 1949 of the Civil Code).
However, if Pedro had an urgent need for the vehicle, Tito would be in delay for failure
to immediately return the same, then Tito would be held liable for the extraordinary
expenses.

A, upon request, loaned his passenger jeepney to B to enable B to bring his sick wife
from Paniqui, Tarlac to the Philippine General Hospital in Manila for treatment. On the
way back to Paniqui, after leaving his wife at the hospital, people stopped the
passenger jeepney. B stopped for them and allowed them to ride on board,
accepting payment from them just as in the case of ordinary passenger jeepneys plying
their route. As B was crossing Bamban, there was an onrush of lahar from Mt. Pinatubo.
The jeep that was loaned to him was wrecked.

1) What do you call the contract that was entered into by A and B with respect to
the passenger jeepney that was loaned by A to B to transport the latters sick wife to
Manila?

2) Is B obliged to pay A for the use of the passenger jeepney?

3) Is B liable to A for the loss of the jeepney?

UP LAW:

1) The contract is called "commodatum". [Art. 1933. Civil Code). COMMODATUM is a

contract by which one of the parties (bailor) delivers to another (bailee) something not
consumable so that the latter may use it for a certain time and return it.

2) No, B is not obliged to pay A for the use of the passenger Jeepney because
commodatum is essentially gratuitous. (Art. 1933. Civil Code]

3) Yes, because B devoted the thing to a purpose different from that for which it has
been loaned (Art. 1942, par. 2, Civil Code)
A borrowed Bs truck. During a fire which broke out in As garage, he had time to save
only one vehicle and he saved his car instead of the truck. Is he liable for the loss of Bs
truck? Why?

Uribe Audio:

This is a case of commodatum. Yes, he is liable for the loss because under Article 1942
paragraph 5, If being able to save either the thing borrowed or his own thing, he chose
to have the latter, the bailee is liable for the loss of the thing even if it should be through
a fortuitous event.

2. A deposit made in compliance with a legal obligation is:

a) an extrajudicial deposit;

b) a voluntary deposit;

c) a necessary deposit; (Uribe Audio)

d) a deposit with a warehouseman;

e) letters a and b

In the province, farmer couple borrowed money from the local merchant. To
guarantee payment, they left the Torrens Title of their land with the merchant, for him to
hold until they pay the loan.

Is there a

contract of pledge,

contract of mortgage,

contract of antichresis, or

none of the above?

Explain.

Uribe Audio:

This is not anti-chresis because there is nothing in the problem that the creditor
will have right to fruits.

On its face, it is not a pledge because pledge only applies to movable

properties. In the problem, it is a piece of land that is the object.
 It is a mortgage because there is no particular form by law for the validity of the
contract. Real Estate Mortgage must be registered. If not, contract is still binding upon
the parties. It can still be binding even if it is in a private instrument. The mortgagee has
right to compel the mortgagor to comply with the formalities required by law (Art.
1357)

What do you understand by ANTICHRESIS? How is it distinguished from pledge and

mortgage?

Uribe Audio:

ANTICHRESIS is a formal contract. It needs to be in writing for it to be valid. Art.

2132. By the contract of antichresis, the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of
interest, if owing and thereafter to the principal of his credit.

(See below for Pledge and Mortgage)

UST LAW:

Antichresis Pledge

1. Refers to real 1. Refers to personal

property property

2. Perfected by mere 2. Perfected by

consent delivery of the thing
pledged

Antichresis Real Mortgage

1. Property is delivered 1. Debtor usually

to creditor retains possession
of the property

2. Creditor acquires only 2. Creates a real

the right to receive the over the property
fruits of the property,
hence, it does not
produce a real right

3. The creditor, unless 3. The creditor has

there is stipulation to the no such obligation
contrary, is obliged to
pay the taxes and
 charges upon the estate

4. It is expressly 4. There is no such

stipulated that the obligation on part of
creditor given possession mortgagee
of the property shall
apply all the fruits thereof
to the payment of
interest, if owing, and
thereafter to the principal

Distinguish a contract of chattel mortgage from a contract of pledge. (2%)

Uribe Audio:

Pledge is the only real contract that is also an accessory contract. All the other
contracts are principal contract.

Chattel Mortgage, as far as cause is concerned, is the same cause as in the

principal contract.

UP LAW:

In a contract of CHATTEL MORTGAGE possession belongs to the creditor, while in

a contract of PLEDGE possession belongs to the debtor.

A chattel mortgage is a formal contract while a pledge is a real contract.

A contract of chattel mortgage must be recorded in a public instrument to bind

third persons while a contract of pledge must be in a public instrument containing
description of the thing pledged and the date thereof to bind third persons.

UST LAW Memory Aid:

Chattel Mortgage Pledge

1. Delivery of the 1. Delivery of the

personal property to the thing pledged is
mortgage is not necessary
necessary

2. registration in the 2. registration not

Chattel Mortgage necessary to be
Registry is necessary
 for its validity valid

3. If property is 3. Debtor is not

foreclosed, excess over entitled to excess
the amount due goes to unless otherwise
the debtor agreed or except in
case of legal pledge

4. If there is deficiency 4. If there is

after foreclosure, deficiency, creditor
creditor is entitled to is not entitled to
deficiency from the recover
debtor, except under notwithstanding any
Art. 1484 stipulation to the
contrary

Distinguish between a contract of real estate mortgage and a contract of sale with
right of repurchase.

Arlene:

As to nature: Real estate Mortgage is an accessory contract in a contract of loan.

Contract of Sale with a right of repurchase is a principal contract.

As to transfer of ownership: In Contract of Sale with Right to Repurchase, ownership is

transferred to the vendee. In Real Estate Mortgage, ownership is retained by the
mortgagor because the contract is merely for security of the loan.

CHATTEL MORTGAGE: SUBJECT MATTER

X constructed a house on a lot which he was leasing from Y. Later, X executed a

chattel mortgage over said house in favor of Z as security for a loan obtained from the
latter. Still later, X acquired ownership of the land where his house was constructed,
after which he mortgaged both house and land in favor of a bank, which mortgage
was annotated on the Torrens Certificate of Title. When bidder at the foreclosure sale,
foreclosed the mortgage and acquired Xs house and lot. Learning of the proceedings
conducted by the bank, Z is now demanding that the bank reconvey to him Xs house
or pay Xs loan to him plus interests. Is Zs demand against the bank valid and
sustainable? Why?

UP LAW:

No, Zs demand is not valid. A building is immovable or real property whether it is

erected by the owner of the land, by a usufructuary, or by a lessee. It may be treated
as a movable by the parties to chattel mortgage but such is binding only between
them and not on third parties (Evangelista v. Alto Surety Col, inc. 103 Phil. 401 [1958]). In
this case, since the bank is not a party to the chattel mortgage, it is not bound by it, as
far as the Bank is concerned, the chattel mortgage, does not exist. Moreover, the
chattel mortgage does not exist. Moreover, the chattel mortgage is void because it
was not registered. Assuming that it is valid, it does not bind the Bank because it was
not annotated on the title of the land mortgaged to the bank. Z cannot demand that
the Bank pay him the loan Z extended to X, because the Bank was not privy to such
loan transaction.

ANOTHER SUGGESTED ANSWER:

No, Zs demand against the bank is not valid. His demand that the bank reconvey to
him Xs house presupposes that he has a real right over the house. All that Z has is a
personal right against X for damages for breach of the contract of loan.

The treatment of a house, even if built on rented land, as movable property is void
insofar as third persons, such as the bank, are concerned. On the other hand, the Bank
already had a real right over the house and lot when the mortgage was annotated at
the back of the Torrens title. The bank later became the owner in the foreclosure sale. Z
cannot ask the bank to pay for Xs loan plus interest. There is no privity of contract
between Z and the bank.

ALTERNATIVE ANSWER:

The answer hinges on whether or not the bank is an innocent mortgagee in good faith
or a mortgagee in bad faith. In the former case, Zs demand is not valid. In the latter
case, Zs demand against the bank is valid and sustainable.

Under the Torrens system of land registration, every person dealing with registered land
may rely on the correctness of the certificate of title and the law will not in any way
oblige to him to look behind or beyond the certificate in order to determine the
condition of the title. He is not bound by anything not annotated or reflected in the
certificate. If he proceeds to buy the land or accept it as a collateral relying on the
certificate, he is considered a buyer or a mortgagee in good faith. On this ground, the
Bank acquires a clean title to the land and the house.

However, a bank is not an ordinary mortgagee. Unlike private individuals, a bank is

expected to exercise greater care and prudence in its dealings. The ascertainment of
the condition of a property offered as collateral for a loan must be a standard and
indispensable part of its operation. The bank should have conducted further inquiry
regarding the house standing on the land considering that it was already standing
there before X acquired the title to the land. The was then valued only at P1 Million.
Lawrence was declared bank cannot be considered as a mortgagee in good faith. On
this ground, Zs demand against the Bank is valid and sustainable.

Vini constructed a building on a parcel of land he leased from Andrea. He chattel

mortgaged the land to Felicia. When he could not pay Felicia, Felicia initiated
foreclosure proceedings. Vini claimed that the building he had constructed on the
leased land cannot be validly foreclosed because the building was, by law, an
immovable. Is Vini correct?

URIBE AUDIO:

Vini is now estopped from questioning the validity of the mortgage by reason of
estoppel.

UP LAW:

a) The Chattel Mortgage is void and cannot be foreclosed because the building is an
immovable and cannot be an object of a chattel mortgage.

b) It depends. If the building was intended and is built of light materials, the chattel
mortgage may be considered as valid as between the parties and it may be
considered in respect to them as movable property, since it can be removed from one
place to another. But if the building is of strong material and is not capable of being
removed or transferred without being destroyed, the chattel mortgage is void and
cannot be foreclosed.

c) If it was the land which Vini chattel mortgaged, such mortgage would be void, or
at least unenforceable, since he was not the owner of the land.

If what was mortgaged as a chattel is the building, the chattel mortgage is valid as
between the parties only, on grounds of estoppel which would preclude the mortgagor
from assailing the contract on the ground that its subject-matter is an immovable.
Therefore Vini's defense is untenable, and Felicia can foreclose the mortgage over the
building, observing, however, the procedure prescribed for the execution of sale of a
judgment debtor's immovable under Rule 39, Rules of Court, specifically, that the notice
of auction sale should be published in a newspaper of general circulation.

d) The problem that Vini mortgaged the land by way of a chattel mortgage is
untenable. Land can only be the subject matter of a real estate mortgage and only
an absolute owner of real property may mortgage a parcel of land. (Article 2085 (2)
Civil Code). Hence, there can be no foreclosure.

But on the assumption that what was mortgaged by way of chattel mortgage was the
building on leased land, then the parties are treating the building as chattel. A building
that is not merely superimposed on the ground is an immovable property and a chattel
mortgage on said building is legally void but the parties cannot be allowed to disavow
their contract on account of estoppel by deed. However, if third parties are involved
such chattel mortgage is void and has no effect.

To secure the payment to B of a loan, A, the owner of a lot, executed a chattel

mortgage on the building he erected thereon as well as on some newly bought
machinery stored therein. Thereafter, a judgment was rendered against A in favor of C
who had the building and machinery levied upon to satisfy the judgment.

Is the chattel mortgage binding on C? Explain.

URIBE AUDIO:

As to the building, it is not binding. As to the newly bought machinery, it is

binding if it is registered.

IV. PLEDGE, CHATTEL MORTGAGE: ESSENTIAL REQUISITES

A, B and C are the co-owners in equal shares of a residential house and lot.
During their co-ownership, the following acts were respectively done by the co-owners:

B and C mortgaged the house and lot to secure a loan.

b) What is the legal effect of the mortgage contract executed by B and C?

Reasons.

UP LAW:

The mortgage shall not bind the 1/3 right and interest of A and shall be deemed to
cover only the rights and interests of B and C in the house and lot. The mortgage shall
be limited to the portion (2/3) which may be allotted to B and C in the partition (Art.
493, Civil Code).

Bruce is the registered owner of a parcel of land with a building thereon and is in
peaceful possession thereof. He pays the real estate taxes and collects the rentals
therefrom. Later, Catalino, the only brother of Bruce, filed a petition where he,
misrepresenting to be the attorney-in-fact of Bruce and falsely alleging that the
certificate of title was lost, succeeded in obtaining a second owners duplicate copy of
the title and then had the same transferred in his name through a simulated deed of
sale in his favor. Catalino then mortgaged the property to Desiderio who had the
mortgage annotated on the title. Upon learning of the fraudulent transaction, Bruce
file a complain against Catalino and Desiderio to have the title of Catalino and the
mortgage in favor of Desiderio declared null and void.

Will the complaint prosper, or will the title of Catalino and the mortgage to
Desiderio be sustained?
UP LAW:

The complaint for the annulment of Catalino's Title will prosper. In the first place,
the second owner's copy of the title secured by him from the Land Registration Court is
void ab initio, the owner's copy thereof having never been lost, let alone the fact that
said second owner's copy of the title was fraudulently procured and improvidently
issued by the Court. In the second place, the Transfer Certificate of Title procured by
Catalino is equally null and void, it having been issued on the basis of a simulated or
forged Deed of Sale. A forged deed is an absolute nullity and conveys no title. The
mortgage in favor of Desiderio is likewise null and void because the mortgagor is not
the owner of the mortgaged property. While it may be true that under the "Mirror
Principle" of the Torrens System of Land Registration, a buyer or mortgagee has the right
to rely on what appears on the Certificate of Title, and in the absence of anything to
excite suspicion, is under no obligation to look beyond the certificate and investigate
the mortgagor's title, this rule does not find application in the case at hand because
here. Catalino's title suffers from two fatal infirmities, namely: a) The fact that it
emanated from a forged deed of a simulated sale; b) The fact that it was derived from
a fraudulently procured or improvidently issued second owner's copy, the real owner's
copy being still intact and in the possession of the true owner, Bruce.

The mortgage to Desiderio should be cancelled without prejudice to his right to go after
Catalino and/or the government for compensation from the assurance fund.

A. ABC loaned to MNO P50,000 for which the latter pledged 400 shares of stock
in XYZ Inc. It was agreed that if the pledgor failed to pay the loan with 10% yearly
interest within four years, the pledgee is authorized to foreclose on the shares of stock.
As required, MNO delivered possession of the shares to ABC with the understanding that
the shares would be returned to MNO upon the payment of the loan. However, the
loan was not paid on time.

A month after 4 years, may the shares of stock pledged be deemed owned by
ABC or not? Reason.(5%)

UP LAW:
The shares of stock cannot be deemed owned by ABC upon default of MNO.
They have to be foreclosed. Under Article 2088 of the Civil Code, the creditor cannot
appropriate the things given by way of pledge. And even if the parties have stipulated
that ABC becomes the owner of the shares in case MNO defaults on the loan, such
stipulation is void for being a pactum commissorium.
To secure a loan obtained from a rural bank, Purita assigned her leasehold rights over a
stall in the public market in favor of the bank. The deed of assignment provides that in
case of default in the payment of the loan, the bank shall have the right to sell Puritas
rights over the market stall as her attorney-in-fact, and to apply the proceeds to the
payment of the loan.
 2) Assuming the assignment to be a mortgage, does the provision giving the
bank the power to sell Puritas rights constitute pactum commissorium or not? Why?
(2%)

UP LAW:

1) The assignment was a mortgage, not a cession, of the leasehold rights. A cession
would have transferred ownership to the bank. However, the grant of authority to the
bank to sell the leasehold rights in case of default is proof that no such ownership was
transferred and that a mere encumbrance was constituted. There would have been no
need for such authority had there been a cession.

SUGGESTED ANSWER:

2) No, the clause in question is not a pactum commissorium. It is pactum commissorium

when default in the payment of the loan automatically vests ownership of the
encumbered property in the bank. In the problem given, the bank does not
automatically become owner of the property upon default of the mortgagor. The
bank has to sell the property and apply the proceeds to the indebtedness.

(c) X borrowed money from Y and gave a piece of land as security by way of
mortgage. It was expressly agreed between the parties in the mortgage contract that
upon non-payment of the debt on time by X, the mortgaged land would already
belong to Y. If X defaulted in paying, would Y now become the owner of the
mortgaged land? Why? (3%)

URIBE AUDIO:

No, because this stipulation constitutes Pactum Commissorium.

(d) Suppose in the preceding question, the agreement between X and Y was
that if X failed to pay the mortgage debt on time, the debt shall be paid with the land
mortgaged by X to Y. Would your answer be the same as in the preceding question?
Explain. (3%)

UP LAW:

(a) No, Y would not become the owner of the land. The stipulation is in the nature of
pactum commissorium which is prohibited by law. The property should be sold at public
auction and the proceeds thereof applied to the indebtedness. Any excess shall be
given to the mortgagor.

SUGGESTED ANSWER:

(d) No, the answer would not be the same. This is a valid stipulation and does not
constitute pactum commissorium. In pactum commissorium, the acquisition is
automatic without need of any further action. In the instant problem another act is
required to be performed, namely, the conveyance of the property as payment
(dacion en pago).

V. PLEDGE: LIABILITY in case of deficiency

Mr. Matunod lent Mr. Maganaka the amount of P100,000.00. As security of the
payment of said amount, Maganaka delivered to Matunod two rings in pledge. When
Maganaka failed to pay, Matunod foreclosed, and had the rings sold at auction. The
proceeds of the sale, after deducting expenses, amounted to only P70,000.00.

a) May Matunod demand the deficiency from Maganaka? Explain.

URIBE AUDIO:

No, because if there is deficiency in pledge, no right to recover even if so stipulated.

b) Assume that the proceeds, after deducting expenses, had come up to

P150,000.00, Would Matunod have been entitled to the excess? Explain.

URIBE AUDIO:

No, because without a stipulation that excess goes to pledgor, it will still go the pledgee
that is entitled to the excess.

In absence of stipulation giving to the pledger the excess, it will still go to the pledgee.

PLEDGE: Who is entitled to the excess

(1) A diamond ring and female cow were pledged to secure a loan in the
amount of P100,000. The pledge appeared in a public instrument. A month
later, the cow gave birth. When the amount of the loan was not paid upon
its maturity date, the pledgee caused to be sold at a public auction the ring,
the cow and the cows offspring and the amount of P150,000 was realized.
The pledgor, upon learning of the sale, demanded from the pledgee the
excess in the price over and above the amount of the principal obligation,
claiming that he is entitled to the excess and that the offspring was not
included in the pledge. The pledgee refused to comply with the demand.
How would you decide this conflict? Give your reasons.

(b) Are the right of redemption and the equity of redemption given by law to a
mortgagor the same? Explain. (2%)

URIBE AUDIO:

Right of redemption after sale

Equity before sale

UP LAW:

The equity of redemption is different from the right of redemption. EQUITY OF

REDEMPTION is the right of the mortgagor after judgment in a judicial foreclosure to
redeem the property by paying to the court the amount of the judgment debt before
the sale or confirmation of the sale. On the other hand, RIGHT OF REDEMPTION is the
right of the mortgagor to redeem the property sold at an extra-judicial foreclosure by
paying to the buyer in the foreclosure sale the amount paid by the buyer within one
year from such sale.

(1) X mortgaged his land to the Philippine National Bank (PNB) to secure a
promissory note. He defaulted in the payment of the loan so that the land was sold at
public auction on January 20, 1960, for P3,500 with the PNB as the highest bidder. On
January 20, 1970, X offered to redeem the property in the amount of P3,500. He
enclosed a postal money order for P1,000 as partial payment and stated that the
balance is to be paid in 12 monthly installments. The PNB then discovered that the
sheriffs certificate of sale prepared after the public auction of the land was not
registered so that it caused the same to be registered in January 30, 1970. The PNB
refused the offer of X contending that the offer to redeem was beyond the one-year
period provided under Act No. 3135 and that it was not accompanied by an actual
and simultaneous tender of the entire repurchase price. In view of the refusal of PNB,
X filed an action to repurchase on February 20, 1970. Will the action prosper? Give
your reasons.

Arlene:

The action will not prosper. While the right to repurchase is counted one
year from the registration, it is also required that the redemptioner should pay
the full amount. (Heirs of Norberto Quisumbing v. PNB, 2009)
Under Sec. 6 of Act 3135, in all cases in which an extrajudicial sale is made
under the special power hereinbefore referred to, the debtor, his successors in
interest or any judicial creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the same at any time within
the term of one year from and after the date of the sale; and such redemption
shall be governed by the provisions of sections four hundred and sixty-four to
four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as
these are not inconsistent with the provisions of this Act. (Emphasis supplied)

And the pertinent provision of the Code of Civil Procedure, now Section
28 of Rule 39 of the Revised Rules of Civil Procedure, reads:
 SEC. 28. Time and manner of, and amounts payable
on, successive redemptions; notice to be given and filed.
The judgment obligor, or redemptioner, may redeem the
property from the purchaser, at any time within one (1)
year from the date of the registration of the certificate of
sale, by paying the purchaser the amount of his
purchase, with one per centum per month interest
thereon in addition, up to the time of redemption,
together with the amount of any assessments or taxes
which the purchaser may have paid thereon after
purchase, and interest on such last named amount of the
same rate; and if the purchaser be also a creditor having
a prior lien to that of the redemptioner, other than the
judgment under which such purchase was made, the
amount of such other lien, with interest. (Emphasis
supplied)
Clearly, the right of redemption should be exercised within the
specified time limit, which is one year from the date of registration
of the certificate of sale. The redemptioner should make an actual
tender in good faith of the full amount of the purchase price as
provided above, i.e., the amount fixed by the court in the order of
execution or the amount due under the mortgage deed, as the
case may be, with interest thereon at the rate specified in the
mortgage, and all the costs, and judicial and other expenses
incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property
less the income received from the property.
xxxx
In BPI Family Savings Bank, Inc. vs. Veloso, we held:
The general rule in redemption is that it is not
sufficient that a person offering to redeem manifests his
desire to do so. The statement of intention must be
accompanied by an actual and simultaneous tender of
payment. This constitutes the exercise of the right to
repurchase.
xxxx
Whether or not respondents were diligent in
asserting their willingness to pay is
irrelevant. Redemption within the period allowed by law
 is not a matter of intent but a question of payment or
valid tender of the full redemption price within said
period. (Emphasis supplied)

A contract of antichresis is always:

a) a written contract;

b) a contract with a stipulation that the debt will be paid through receipt of the fruits
of an immovable;

c) involves the payment of interests, if owing;

d) all of the above; (CODAL, 2132)

e) letters a and b